International Cigar Discount Shop

INTRODUCTON    

No company today is in a particular stable environment. Even traditionally stable industries have witnessed and continue to experience turbulent change. Thus, the dynamic and changing environments that organisations face require adaptation, sometimes call for deep and rapid responses, “Change or die!” is the rallying cry among today’s managers worldwide. Forces such as, nature of the workforce, technology, economic shocks, competition, social trends and world politics act as stimulants of change.  

The theory of Privatisation and competition and the related academic literature suggests that Privatisation produces significant organisational change and that those changes, in conjunction with market forces and appropriate government actions, will produce positive results—in terms of profitability, efficiency, etc. Many changes in organisations just happen. Some organisations treat all changes as accidental occurrence, but we’re concerned here with the planned change that occurred during the Privatisation process at Al-Ahram Beverages Company (ABC) that supposedly sought to improve the ability of the firm to adapt to changes, and to change the employee behaviour.

 THE REPORT OBJECTIVES

This report examines the relationship between Privatisation of state-owned enterprises (SOEs), organisational change, behaviour and performance – the case of Al-Ahram Beverages (ABC). It explores the processes in which Privatisation affects corporate performance through the internal changes within the organisation. The analysis shows significant difference across the types of ownership pertaining to organisational elements that were expected to change. The evidence suggested that the Privatisation process altered the behaviour, incentives and performance of formerly state-owned enterprises (SOEs).

It also analyses, at the micro-institutional level, organisational change and the transformation of Egyptian SOEs in case of ABC. Such analysis of a “success story” on the impact of Privatisation on organisational change and performance would help managers understand the nature of the transformation process, taking place during ownership change. An important by-product of Privatisation and public enterprise restructuring programmes in Egypt is the growing demand for effective managers in both SOEs and privatised firms.

Most studies of the performance of firms’ post-Privatisation have focused on the bottom line, that is, they have examined financial measures to monitor quantifiable indicators of change. But few studies have taken a look at how the post-Privatisation organisational cultures within the firms change organisational behaviour.

Scholars, management experts typically characterise great differences between public sector and private sector management and bureaucratic practices. And the organisational development literature highlights the immense challenges to changing organisational cultures & behaviour. This leads us to this report’s primary question: What is the effect of Privatisation on organisational behaviour in Egypt? The case of Al-Ahram Beverages Company (ABC).

In discovering a lack of empirical data on behavioural changes within firms’ post-Privatisation, we addressed this problem and discussed the changes in organisational culture and behaviour that identifies the variety of outcomes that theory suggests are associated with Privatisation. Then, we attempted to implement the outcomes on Al-Ahram Beverages Case.

  WHY AL-AHRAM BEVERAGES?

Al-Ahram Beverages Firm was established more than 110 years ago. The story began in 1897 when the Crown Brewery Firm (ABC’s oldest forerunner) registered itself in the kingdom of Belgium (home of the well known Stella Artois beer) to start operation in Alexandria.

Later in 1946, the firm entered into a technical-assistance agreement with the leading Dutch brewer Heineken. However, in 1963 the firm was nationalised and was run by the government for the past 50 years. After more than 22 years, the firm finally changed its name into Al Ahram Beverages Firm (ABC).

Al Ahram Beverages Firm (ABC) has evolved from an antiquated Egyptian public sector brewery to dynamic world class Beverages Firm. In 1997 an Egyptian entrepreneur bought it during the era of Privatisation. Along the way ABC has been acclaimed “The model of Privatisation”.

Finally in 2002, the firm commitment to development led to the acquisition of ABC by Heineken group, yet it remained for 3 years under the management of the previous owner.

In January 2006, the firm went through a complete change in all its domains and activities. Today ABC boasts a wide ranging beverage portfolio including beer, wine, spirits and its pioneering non-alcoholic malt beverages; Fayrouz, Birell & Amstel Zero.  The firm is now under the management of a national and multinational team.

Egypt is now among Heineken’s 20 largest markets, and the Dutch firm has put wine at the forefront of their latest marketing push. Egypt’s history as a winemaking nation is well documented; Pharaonic vineyards were among the first on human record. But spurring local consumption is still big task for the beverage firm. Both supply and demand in the modern industry depend largely on foreigners — Al-Ahram’s chief executive is Belgian and over 80 percent of wine sales come from tourists.

ABC was classified by Forbes Global magazine as one of the 200 best-managed small businesses in 2001, and one of the top 20 in 2000. The company’s shares were listed on the Cairo & Alexandria Stock Exchange (CASE), and it was honoured with MEED’s Business-to-Consumer Product Manufacturer award of 2002 for business excellence. Experts in global business applauded ABC for being the best Privatisation success story in the world.

LITERATURE REVIEW

The sale of state-owned enterprises (SOEs) to private sector investors and the competitive, market provision of government goods and services is a quintessential “global public policy.” More than 160 countries have taken actions to privatise their industries. The World Bank, the International Monetary Fund and other multilateral institutions advocate – at times require – Privatisation policies to be adopted as a condition of assistance and loans.

The policy logic of ‘Privatisation and competition as reform’ (PCR) is founded in the fundamental proposition that private sector management of enterprises – utilities in particular- is different from and superior to their management by governments. Even in areas of traditionally essential government services PCR is increasingly prescribe. One way to engage private management to the operation of enterprises is to transfer ownership – partial or full – to private investors; although there are numerous other approaches to accomplishing the same ends. The emergence of PCR as a global policy has been sparked by both ideological and practical considerations.

The dissolution of the Soviet Union and the resulting transformation of the economies of the Former Soviet Union (FSU) and Eastern European countries have relied on Privatisation policies as a vehicle for making a transition to market-like economies and greater integration with the global economy. The sale of shares in state-owned enterprises raised government revenues that reduced budget deficits in a timely way.

One area in which SOEs can be differentiated from the private enterprises is the nature of their goals and objectives. In typical analyses of agency costs in SOEs, researchers rely on the assertion that managers in SOEs focus on the objectives of politicians, rather than maximise enterprise efficiency. In SOEs, the goals are blurred, multiple, conflicting and unstable, and include both financial and political objectives. This view is well established in the literature. However, it has been widely acknowledged that the goal in private firms is clearer and related to profit maximisation and value creation for shareholders. Apart from commercial goals, some SOEs may include macro-economic goals concerned with some issues as employment, inflation, equity and so forth. This is certainly true in the Egyptian case where SOEs are viewed as a business entity and the government tool to realise macro-economic objectives.

In private firms, managers’ main goals are the pursuit of long term profits for their shareholders. SOEs are predicted to be low performers because politicians impose objectives on them which may help them gain votes but conflict with efficiency and customer orientation. Following Privatisation, senior managers have discretion to redefine organisational goals to reflect the objectives of their key stakeholders.

As firms move from public to private, it is expected that Privatisation changes organisational mission and goals that put more emphasis on the search for the efficiency, customer satisfaction and reduce social consideration.

From a corporate governance view, the benefits of ownership change could be explained in several ways. Firstly, managers in Privatised firms have to achieve a successful transfer from public to private governance and must implement numerous policies in order to achieve expected gains in performance. Managers should develop strategies based on analysis of industry and market and technological opportunities. Following Privatisation, managers are expected to have the discretion to redefine the organisational goals to reflect the objectives of their key stakeholders.

Secondly, the benefit of Privatisation can be achieved by delegating management functions to professional managers who have the required training and knowledge at all levels of the company. The separation of ownership and management could, however, encourage management to be largely unaccountable to equity holders and to pursue its own interests at the shareholders’ expense (agency costs). Privatised companies could develop internal and external control mechanisms that reduce the losses associated with the separation of ownership from management.  Internal control mechanisms in which incentives and monitoring devices are established encourage professional managers to act in the shareholders’ best interest. When internal control mechanisms work well, the board of directors changes the top management as needed in the best interest of the corporation. When internal control mechanisms are deficient, however, external control mechanisms (through stock prices, takeovers, and relation based control) may be used to realign managers’ interests with those of investors.

As predicted in agency theory, control mechanisms in private firms can be expected to be more effective than those in SOEs, since the internal control departments and boards of directors who exercise control in private firms usually are better informed than their counterparts in SOEs. The objectives of boards and internal control departments are also more aligned to those of firm owners’ than are the objectives of external agencies in general. Managers of SOEs usually have limited discretion to initiate and implement strategic changes and are constrained by bureaucratic controls that limit their scope of activities and authority.

Another expected shift in the organisational behavioural practices is a change in criteria of the Boards’ appointment. The overhaul of top level management in the Privatised firms is expected in order to achieve a successful transformation from public sector mindset to private sector culture. Managers with private sector experiences—equipped by necessary skills in business development and venture, marketing and finance– are needed to capitalise on market and technological opportunities. The appointment of top level management in newly Privatised firms would be based on past experience in commerce rather than those with influence and political connections.

In the private sector corporate governance mechanisms often ensure that managerial behaviour is monitored and controlled through market mechanisms such as share prices, prospective investors and the media. This may explain why share issue Privatisations can lead to a significant impact on the efficiency of the enterprises. However, researchers have underlined that developing countries – such as Egypt – lack market-supporting institutions. In this case, managers may rely largely on layoffs and on increasing sales to bring companies to profitability. Even when widely dispersed and individually weak shareholders intend to replace incumbent management, they lack the ability to attract appropriately qualified managerial candidates, and they generally fail to provide management with the support it needs to implement drastic turnaround in operations and in culture

The stereotype of public enterprises structure is that SOEs are bureaucratic, inflexible, rigid and unable to adapt to the external environment. Politically controlled bodies have politically defined structures – these are likely to be non-optimal after Privatisation. Therefore, it is expected that as firms move from public to private, there will be a change in organisational structure. Furthermore, drawing upon the field of managerial and organisational research writers, Privatisation is associated with a movement from a functional form of organisation to control inputs and outputs for the whole organisation, and usually requiring activities arranged in profit or cost centres. Privatisation is associated with the move to a flattening of the managerial pyramid and an ‘m-form’, rather ‘u-form’ structure.

Furthermore, by releasing managers from politicians’ control; Privatisation may free managers to exercise their latent managerial talent. Middle-level managers, for example, whose main role under state ownership was one of mere administrative control, might find their jobs content changed as they become responsible for implementing changes and for coordinating and motivating the teams they supervise.

Privatised companies also change their organisational structures to ensure faster decision making by eliminating layers of management and reducing bureaucratic rules, and integrating individuals/units in the organisation. Flatter organisational structures, therefore, are more common in Privatised companies, and they usually facilitate communication and cooperation between individual and units. Improved communication can strengthen employee commitment to the organisation, encouraging employees to be more productive and innovative (Perceived Organisational Support).

Egypt‘s Privatisation programme has effectively been under way since May 1996. Since that time the government has proceeded to sell off much of the portfolio slated for Privatisation under Law 203, and has employed both the Stock Exchange and the strategic sales methods as the primary mechanisms for effecting transactions. While there is no doubt that the Privatisation of such a large portfolio of government enterprises is a major achievement, there is presently very little information available about the post-Privatisation development of these companies.

It is too early to argue conflicts between employment and human resource resulting from Privatisation, but these conflicts show us the significant importance between labour issue and Privatisation policy. Transformation process of public enterprises generates extensive and far-reaching effects on labour, the employment relationship and the social security in particular. This issue is less well addressed by the existing literature. In order to minimise the adverse affects of the transition of public enterprises, some literature has claimed that it is crucial to raise public awareness of the costs, benefits, timing and methods of such transition through wide worker participation.

PRE-PRIVATISATION ORGANISATIONAL BEHAVIOUR

Other than being institutionalised in the organisational structure of state apparatus, authoritarianism and centralisation are reinforced by the organisational culture of public administration and reflect the general culture of the Egyptian society as a whole. Authoritarian patterns of behaviour are bred, sustained and perpetuated by paternalistic family structures, religious and educational institutions, and the political system in general. In a large bureaucracy with a promotion system based on seniority rather than performance, low basic monthly salaries, and supplementary payments controlled by senior management, employees are encouraged to be in the good books of their superiors. Submission to one’s superiors becomes necessary to secure the supplementary payments and tolerance for employees’ eventual absenteeism when they take other part-time jobs. Having reached their position thanks to their long years of service or contacts and not professional merit, senior officials derived their prestige solely from their bureaucratic rank which gave them the authority to punish or reward junior staff. Senior officials were keen to maintain their authority and refuse to delegate any of their responsibilities to junior staff. In the absence of significant financial compensation for reaching a senior position after long years of service and an unfulfilling professional career, authority over fellow colleagues probably served as a self-actualising psychological reward to the civil servant. This explains the high degree of resistance to any decentralisation or delegation of authority (resistance to change).

All Egyptian SOEs – including ABC – portrayed a pattern of significant power distance where society accepted that the unequal distribution of political and economic power is also reflected in an unequal distribution of power and authority in state institutions and organisations. However, the prevalent attitude became one of the veiled resistances to such authority. That is, they nominally accept authoritarianism, but in practice incapacitate it. For instance, employees would fake compliance with decrees, but minimised their input and try to maximise their benefits, either by increasing absenteeism and procrastination, or by engaging in corruption and favouritism. In this context public officials were accountable only to higher layers of administration and citizens become a superfluous detail.

Having reviewed the organisational structure and culture of the state-owned enterprises (SOEs) in Egypt, we can see that the potential agents of change and innovation were primarily top management and that civil servants were considered uncooperative subjects of reform and not partners in change.

Previous studies lead us to conclude that top leaderships in the public sector were those who are most empowered to initiate and steer change, but were the least interested to implement it on the overall system. Innovators were, to a large extent, either intimidated by economic and political costs or are marginalised in non-decision making positions.

Recent trends in public sector reform approaches the issue of leadership in civil service with enthusiasm, dedicating a considerable attention to developing leadership skills and facilitating the promotion of promising individuals to decision making position. The idea is that reform needs visionary leaders that are committed to change, willing to take risks and whose expertise and personal integrity guide and invigorate reforms.

However, in the context of the personalised and authoritarian culture of SOEs, we ought to be careful not to mix between visionary and charismatic leaderships. Charismatic leadership is based on the personal traits of individual leaders and their capacity to drive others to achieve specific goals. Charismatic leaders tend to be autocratic and hardly institutionalise change, which is directly linked to their person.

Visionary and directive leaders, on the other hand, are more oriented towards involving their staff in goal-setting, internalising reforms in daily operational procedures of institutions and empowering their staff thus inspiring enthusiasm, commitment and leadership skills at the various levels of the organisation. Visionary and directive leaderships are more likely to bring about an institutional development that is sustainable.

PRIVATISATION

“Privatisation became the organisational buzzword of the 1980s and is destined to reshape public administration into the next century. The term is at once a diagnosis of popular dissatisfaction with government (government is inherently inefficient) and a prescription to cure its ill. In turn, the growth of Privatisation poses enormous new challenges to personnel management and the training of future public servants. It is often assumed that employment will fall when Privatisation occurs, since the new private owners will be willing to maintain the surplus labour associated with the public ownership of the enterprise. The loss of employment will have an immediate adverse impact of social protection status of the labour. Opposition to Privatisation on the grounds that it will weaken the position of labour, is therefore expressed.

Organisational level responses to Privatisation have not been widely studied. The enormous changes in organisational behaviour, strategy and structures, systems and incentives (i.e. changes in the ‘black box’) need to be systematically and thoroughly studied in order to gain insights into the transformation processes of SOEs. The key argument here is that only those Privatisation processes that bring about positive organisational changes fundamentally different from SOEs and suitable to a competitive market environment lead to improved firm performance.

Concerns about the social hardships for workers and their family, especially when alternative employment opportunities and social safety nets are lacking, are often major concerns during the Privatisation process. While many laid-off workers suffer only temporary losses and can recover if they move quickly to expanding sectors. Others suffer longer-term losses or shift into lower-paying jobs.

The following points offer some analytical background of the effect of Privatisation on labour:

(a) When an enterprise has surplus labour for a given production level, Privatisation aiming at increasing the firm’s efficiency is likely to lead to some reduction in the work force;

(b) Privatisation might induce the new owners to introduce capital-intensive technologies. This may result in lower wages and a need for fewer employees;

(c) The newly Privatisation enterprises may restrict output level in order to maximise profits.

This can have a corresponding negative effect on employment; and cheap labour is an incentive for foreign investors to participate in the Privatisation programme. Investors benefit when firms pay their workers low wages and reduce the number of employees. The Privatisation of SOEs often involves the changes in the hiring, firing and working conditions of their employees. The impact can be positive or negative, depending on the situation of each case and the subjective viewpoint of each worker. In the short term, employees may have to adapt to changes in the terms and conditions of service, including the need for retraining and greater job mobility, less security of tenure and loss of certain benefits and perks. Evidence gained suggests that Privatisation and economic liberalisation tends to reduce employment and/or lead to a reduction of wage.

  ABC’s POST-PRIVATISATION ORGANISATIONAL CHANGES

STRUCTURAL CHANGES

This report provides insight into how organisational changes that accompanied the Privatisation process at ABC influenced the organisational behaviour within the Privatised firm. The report found pronounced variations between ABC as a public and Privatised firm in the importance attached to efficiency, cost effectiveness (cost control) and customer-focused goals. Managerial incentives were increased after Privatisation in the search for efficiency, cost control and improvement of product and service quality, where there was a shift from ‘engineering excellence’ to ‘customer excellence’ mentality of government departments and the dominance of technical experts, the firm went through significant changes in the number and structure of employees, and radical transformation of management systems towards customer-oriented behaviour, teamwork practices and shareholder value policies.

The firm as a SOE had been generally characterised by inefficiencies because of overstaffing, dependence on subsidies, absence of competition, and poorly managerial incentives. Internally, the firm was corrupt, irrationally organised and overstaffed, with approximately five times the number of employees actually required. Promotions were seniority- rather than merit-based. Few formal systems were in place. Therefore, cost savings and efficiency behaviour were the most frequently observed sources of performance improvement after Privatisation.

The effects of Privatisation on the characteristics of corporate governance at ABC were found to be significant in relation to perceived improvements to both the external and internal control mechanisms of the organisation. Significant differences were found in corporate governance practices, particularly in terms of the existence of audit committees that were independent from management. Furthermore, ABC as a Privatised firm was more likely to disclose company information, for instance, in related party transactions and reward systems. Privatisation also lessened the room for political interference in the strategic decision-making process and the appointment of Boards of directors. Boards were given the responsibility for strategic direction and commercial performance, with incentives based on commercial performance indicators. All of these changes led to increased managerial discretion in the entrepreneurship transformation.

As the firm moved from public to private, the organisational structure tended to become flatter, more organic and decentralised, and moved to a matrix form of structure in order to facilitate organisational integrations. ABC also reported improved communication and coordination among individuals and units following Privatisation as the organisation moved towards reducing bureaucratic rules. Notably, changes in organisational structure following Privatisation were not just seen as a continuous process; they were also seen to be multi-dimensional in nature. Through various transitional stages, structures were flattened dramatically, leaving only four to five levels in operational areas.

Almost immediately upon gaining control of the company in February 1997, the Luxor Group began the task of transforming the company’s management and operational development. They appointed five new executives (including three non-Egyptians) within the first one hundred days of its take over of ABC. During the next 100 days another seven senior executives were hired. Most of the appointments were made in the area of investor relations and media, human resource management, marketing, export promotion and sales management. These appointments reflected an over-haul of senior management at the company. Another 45 people have also been appointed to ABC’s sales force.

Although the majority of the company’s 3200 strong pre-Privatisation workforce remained with the company, the Privatised firm succeeded in removing much of the middle and senior management which was associated with ABC’s rentierist practices under the public sector, hence clearing the way for substantial restructuring of the company’s internal organisational culture.

CHANGE IN CORPORATE CULTURE

While the Privatised firm has achieved a great deal in eliminating the public sector personality of the company (i.e. public sector management titles have for the most part been replaced with standard private sector titles such as marketing manager, sales manager; hierarchical promotions have been replaced by a meritocracy based system; the work regime at the company is characterised by long hours and much higher official salaries for middle management), high levels of internal bureaucracy is still present at the company. Managerial decision-making, while having adopted the style of a multinational corporation, still has to proceed through a sequence of “in-house approvals”, which cause noticeable delays to the conduct of business (though this is not an uncommon feature of internal organisation that one will find at numerous other Egyptian public and private sector enterprises).

A number of conclusions about the foundations of this culture can be drawn from this analysis of authority relations. Post-Privatisation structures that were intended to limit power and provide some measure of accountability did not function – even when management changed. The absence of countervailing powers or checks on the CEO – even the Belgian one – allowed him to still be the leviathan. Power is still centralised and concentrated in his person. Rigid hierarchy and arbitrary authority led to sycophantism, fear, and obeisance. With so much discretionary power, subordinates were unable to engage with superiors as relative equals and were unwilling to question or criticise.

PERFORMANCE EVALUATION SYSTEM

Performance evaluation serves a number of purposes. One purpose is to help management make general human resource decisions. Evaluations provide input into important decisions such as promotions, transfers, and terminations. Evaluations also identify training and development needs. They pinpoint employee skills and competencies that are currently inadequate but for which remedial programmes can be developed. Evaluations also fulfil the purpose of providing feedback to employees on how much the organisation views the performance. Furthermore, performance evaluations are the basis for reward allocations. Decisions as to who gets merit pay increases and other rewards are frequently determined by performance evaluations. Each of these functions of performance evaluation is valuable. Yet their importance depends on the perspective the organisation is taking. Several are clearly relevant to human resources management decisions. But our interest here is in organisational behaviour. As a result, we are emphasising on performance evaluation as a mechanism for providing feedback and as a determinant of reward allocations.

Under the public sector, ABC developed a reputation of an internally hierarchical organisation, where people were promoted or rewarded on the basis of their seniority in the hierarchy – not on the merit of their performance. The Privatised firm promoted meritocracy ahead of seniority, sought to replace ABC’s internal organisational culture with a modern multinational management technique by introducing a Performance Evaluation System. This device outlined a job description for every one of ABC’s employees, and through a series of bi-annual performance appraisal meetings between the employee and an appointed supervisor, the progress of ABC’s entire staff would be monitored and employees held accountable for their performance.

Performance has also been affected by changes in the internal environment of the firm including organisation structure, objectives, management, labour relations, communication and reporting system and the nature and location of business. However, employees’ welfare and labour relations were quite limited and have received the least priority in the firm’s Privatisation process.

CHANGE IN HUMAN RESOURCE MANAGEMENT

One of the most anticipated changes in ABC from a SOE to a Privatised firm was in the relationship between management and workers. As a SOE, workers were protected by political factors. As a privatised firm, workers are no longer protected. Compensation became based on productivity, rather than seniority or political contacts. Employee skills, work effort, and contributions to profits were rewarded.

The salaries of senior and middle management at the company (particularly in the sales and marketing departments) are now compatible with most of the leading private sector enterprises and multinational firms in the country. Wages have not increased drastically for the line workers however, though the bonus system and benefits package has been changed at the company since the Privatisation to reflect an employee’s contribution to productivity, rather than length of tenure at the enterprise. Further, ABC’s employees were offered the first share options package made by an Egyptian company and introduced a number of profit-sharing schemes since the Privatisation.

However, the evidence that is available on the employment effects of Privatisation does not seem to confirm a significant reduction in employment levels at the firm as a result of Privatisation.

Moreover, these changes have missed the nature of ‘human resource’. Change in ownership has lead to different structure of incentive for management and resulted in changes in managerial behaviour and performance, where reward is now linked to performance and incentive schemes such as share ownership and option plans.

It is notable that job losses in ABC have generally been addressed in a consensual way, often without collective redundancies: workforce reduction has resulted from staff turnover and through the use of incentives for individual resignation or retirement. This does not mean that there have been no confrontations over employment reductions, but that the parties have generally been able to find an agreement, even in the most controversial situations.

For all practical purposes, the Egyptian Trade Union Federation (ETUF), the national umbrella organisation which includes all factory-level unions, was an extension of the state. As a corporatist entity, it was administered like any other government agency. It was large, bureaucratically incompetent, self-serving, and intellectually bankrupt. It mustered very little if any confidence in the workers it ostensibly served. As an institution, it is used to control and co-opt workers, disseminate propaganda, provide the appearance of representation, and occasionally channel limited services to public-sector employees, workers, and non-workers alike.

There does not appear to be any strong ties between ABC’s labour force and the public sector’s national labour organisations/unions. The union did none of the things unions usually do. Collective bargaining and contract negotiations were unheard of. Strikes and independent organisation remain illegal, and the union does not investigate grievances or management misconduct, defend workers’ rights, or address workers’ concerns.

CHANGES IN ATTITUDES & BELIEFS

Positive beliefs concerning the economic and organisational benefits of Privatisation explained attitudes above and beyond negative beliefs concerning its social and national costs. The interaction between these beliefs, however, indicated that extremely negative beliefs can override positive beliefs. The attitudes of public sector employees were more strongly associated with negative beliefs and less associated with positive beliefs.

In spite of the important role of attitudes in the Privatisation process, most Privatisation efforts have been propelled top-down with minimal input from stakeholders. A better understanding of the role of attitudes in shaping the success or failure of Privatisation at ABC required an assessment of the beliefs about consequences that conform the substrata of attitudes toward Privatisation.

Given the linkage between attitudes and behaviour, an enhanced understanding of the underlying beliefs should’ve proven capable of informing the Privatisation programmes at ABC regarding the level of stakeholder support and targeted programmes toward the most impact-related beliefs.

Union leaders & public employees at ABC strongly opposed Privatisation. However, after receiving a plan that ruled out massive layoffs, which probably was an extremely negative Privatisation-related belief of theirs, their pre-existing positive beliefs changed their attitudes toward Privatisation.  The strongest opposition to Privatisation at ABC has often come from workers and labour unions representing the public sector. This opposition was not surprising because the costs of Privatisation seemed high for public employees and the long-term gains seemed small inasmuch as Privatisation directly threatens their jobs, pay, and influence. Bearing in mind the fact that employees & workers at Al-Ahram Beverages were one of the highest paid in the country.

Evidence suggests that employees at ABC were more likely to believe that Privatisation would increase the efficiency of services, improve customer service, modernise the technology in the country, increase the ability of the country to compete in the global market, and increase the choice and quality of products. However, they seemed less likely to believe that Privatisation will help pay for existing public debt, reduce corruption, increase the efficiency of production, decrease prices by fostering competition, increase government earning from the sale of assets, and reduce the burden on government budgets and the size of government entities.

On the other hand, they seemed concerned about Privatisation fostering private monopolies, increasing the price of subsidised goods and services, decreasing social benefits and increasing popular discontent and unemployment. However, they seemed less concerned with Privatisation depriving the country of technological knowledge, increasing unemployment, increasing social injustice, increasing pollution, selling the country’s heritage at prices below value, and depriving governments of revenue.

CHANGES IN VALUES

One of the most dramatic changes in ABC from pre- to post-Privatised firm related to changes in firm values and goals. Privatisation led to a more stable and productive employment that benefited both the workers (higher wages and benefits) and the general society (higher government tax revenues, increased exports).

Changes in values also generally brought about an increase in employee morale and employee participation. Specifics included improved wages and benefits (such as transportation to and from work, uniforms, and lunches) and much more attention to quality and productivity. All reported a great deal of anxiety through the transition phase and the need for careful planning. Managers reported a shift from “seniority and politics” to “meritocracy” as a basis for rewards, and increased pride in the product and in themselves as workers.

ASSEMBLING A PROFESSIONAL TEAM

“Internally, [your focus must be on] management, management, management, coupled with as much interoffice communications as possible. Keep your door open, and let your workers know that you are there. People are your assets. Don’t forget about your employees, and don’t forget about your consumer.” – Ahmed Zayat reported.

ABC made a successful effort to attract a coterie of highly educated, motivated, and well-experienced managers and employees (following Zayat’s reforms), as a fundamental step for moving from a corrupt, mismanaged firm to an efficient enterprise.

To attract the most-talented managers and employees and simultaneously create long-term shareholder value, as part of the 1997 Privatisation arrangement Zayat introduced two option programs: the Employee Share Option Plan (the “Employee Plan”) and the Managing Director Option Plan (the “Director Plan”), under which 622,500 shares were issued. ABC was the first company in MENA to offer options to its employees at all levels. 

“The superstars were drawn to our company not only because of the challenge and the true growth…we [were] delivering, but also because of what I call the “Magic of Options,” for which we are a pioneer in Egypt. As the single largest shareholder of ABC and as executive chairman, I am proud that we count hundreds of ABC managers and employees as fellow shareholders. I am proud to align [our] financial interests so that we all profit together.” – Zayat

ABC’s employee share option plan offered managers and employees an opportunity to own the company’s shares. Under the Employee Plan, the maximum number of shares for which options could be granted was 250,000, at EGP 105. Maximum shares offered under the Director Plan were 372,500 at EGP 20, and were exercisable only after certain conditions were satisfied. Prices of options offered were determined by the board of directors. The plan thereby succeeded in attracting and retaining highly qualified and talented managers and employees whose interests were aligned with management and other stakeholders. Family members Ahmed and Sherif Zayat, both managing directors, were both granted the Director Plan.

CHANGES IN DECISION MAKING

As noted earlier, Privatisation changed both the decision-making process and the degree of government influence on the decision-making in strategic decisions. Therefore the change in ownership was expected to lessen the scope for political intervention in the operation of the enterprises and to simplify the objectives. In Egypt, the Government not only determined managerial life spans, but also controlled key resources, market channels, and sources of raw materials for SOEs’ operations.

Political influence in any form constrains the SOEs’ managerial actions to implement strategic changes. The result suggested that as firms move from public to private, the forms of political influence were systematically reduced. However, because of the Privatisation programme at ABC, the stock market played a role in which the firm had to disclose any material issues regarding the company’s operation. In 2002, the firm’s shares were listed on the Cairo & Alexandria Stock Exchange (CASE). Consequently, Stock Exchange regulations to some extent constrained any other influences on the decision-making process. It was reported that, as a result, the Boards’ appointment at ABC post-Privatisation was based on professionalism criteria such as business reputation, experiences, business networks and skills. These criteria were believed to be a secondary factor, if not non-existent, before Privatisation. It has been widely accepted that the directors and managers’ appointments at ABC as a SOE were not based on merit but rather on the basis of political connections and ‘cosy’ relationships between government figures and management. The findings support the notion that Privatisation lessened the scope for political influence and interference by government in the decision-making process and appointment of the firm Boards.

Although the literature suggests that Privatised firms become more decentralised, this was not borne out in reality. ABC managers reported more centralisation of decision making until the take over by Heineken. This may be reflective of the need for strategic direction and quick decision making from the board and top leadership. It also may be partially explained by the nature of the work culture in the country and the long period of time that they have spend under a centralised system. However, greater discretion by lower-level managers was also reported by some of the managers, suggesting that decentralisation may be more an implementation than a decision making strategy.

THEORY (X) STILL PREVALENT IN ABC FACTORIES

An ideology justifying inequality and authoritarian social relations still existed post-Privatisation within ABC’s factory. Managers as well as many workers believed that superiors needed to be tough and distant and, in some cases, abusive and condescending to be respected. If superiors became too close to their subordinates, the thinking went, subordinates would lose respect for them and would be unwilling to follow their orders. Control would be lost; the chain of command would deteriorate, and nothing would get done. Domination and inequality were thought to be functionally necessary for respect, authority, and ultimately production.

Ramzi, a young administrator who first worked in the firm as a shift supervisor under the SOE structure reported the potential “dangers” of becoming too friendly with one’s subordinates. At first, unlike most supervisors, Ramzi did not insist that his workers address him formally on the shop floor. As a warning of what this might lead to, however, he recounted an interaction he had with one of his workers outside the factory: I was walking in the street with my wife, and a worker saw me, and she said, “Hello, ya Ramzi. How are you?” My wife asked me who this was. Of course, I couldn’t tell her she was a worker. I said, “She’s a colleague.” But the next day, I told [the worker], “It’s ok to call me Ramzi here [at work], but respect outside is important.” Ramzi echoed the importance of maintaining distance between oneself and one’s subordinates. He and his wife had internalised the system of rigid hierarchy and inequality (and the importance of position, prestige, and so on) to such a degree that he was threatened by a worker addressing him informally in public, in front of his wife. Ramzi did not even need to ask his wife what she thought. He knew that she would find it awkward, if not unacceptable, for his subordinate to address him by his first name.

Workers and other employees regularly suffer from the arbitrary and capricious authority of superiors and lacked functioning institutional mechanisms to redress their grievances. Rigid hierarchy and authoritarian relations are still the norm, and they came across not only in obvious ways such as the CEO’s power or the shift supervisor’s physical abuse of workers, but also in smaller, more subtle practices, mannerisms, and codes of behaviour. Relations of superiority and subordination had become so internalised that they appeared natural and were taken for granted.

Lastly, another important issue identified in this report concerned the importance of leadership and participation in the re-structuring of ABC from a SOE to a Privatised firm and, especially in dealing with the cost of laid off workers. It seemed clear that the leadership ability of the general manager of the firm after Privatisation was a key factor—from a commitment to developing the firm and its employees, to the political skill in dealing with the transition from SOE to a Privatised firm. There are managerial training programs in virtually all aspects, targeting the firm managers & the leadership and management challenges arising during the Privatisation process.

PERCEIVED ORGANISATIONAL SUPPORT (POS)

Post-Privatisation (POS) has shown to be to a high degree in ABC. Employees & workers at the factories have perceived the firm after the Privatisation as supportive when rewards were fair, and the employees had a voice in the decisions (especially after Heineken took over) and when their supervisors became more supportive; thus, they are seen now to have higher levels of organisational citizenship behaviours and job performance.

Fortunately, a positive effect of Privatisation on labour also existed. Workers often gained from Privatisation as the new investments and dynamic expansions resulted in the creation of new jobs at both the firm and sectorial levels, and as productivity leads to better terms and conditions of service. Also, workers that remained with the firm after its Privatisation have often benefited by obtaining better-paying jobs, firm share and improved training and career development prospects. In ABC the new owners increased wages and introduced profit-sharing scheme. Also, in exchange for higher wages, rigid labour contracts often have been revised. Previously agreed terms and contracts were no longer admitted by the newly owners of the firm. Some benefits, such as pension rights, severance payments, early retirement packages were safeguarded by labour law and Privatisation regulations, others such as seniority and service grades, transport, child care and health insurance schemes are still in jeopardy.

CREATIVITY

Organisational creativity at ABC post-Privatisation culture meant deliberately changing current methods to make new levels of quantity, quality, cost, and customer satisfaction possible. The new Privatise structure identified specific results from increasing organisational creativity, including new products and methods, increased efficiency, greater motivation, job satisfaction, teamwork, a focus on customer satisfaction, and more strategic thinking at all levels.

After close examination to the firm’s organisational creativity pattern, it was deducted that the functional cultures or the cultural aspects of whether the individual is viewed as a manager or as a non-manager within the firm may have affected his/her attitudes towards creativity and innovativeness. At ABC, it was found that when compared to non-managers, post-Privatised managers displayed more positive attitudes towards creativity and divergent thinking. This indicated that those in higher organisational positions were more creative-oriented than those in lower positions because they cannot afford not to appear adventurous or not be thought of as people who come up with new, unusual, “off-the-wall” ideas. Such behaviour is associated with seriousness or dedication to the job at hand and hence sustaining self-fulfilling prophecy that they are adaptable to the Privatisation trend.

Gender is one of the most important variables in creativity. Unfortunately, ABC has not reported any evidence on gender differences in attitudes towards organisational creativity. This is one of the gaps that we were unable to fill.

Functional cultures have been found to influence managerial behaviour in Al-Ahram Beverages (ABC) just as most SOE now privatised firms. It was found that managers from different functional areas viewed the same managerial issues in significantly different ways. In fact, “they defined the problem largely in terms of the activities and goals of their own areas’. Functional interpretation could’ve have resulted from “group think” adopted by the new administration, which encouraged individuals working closely to think the same way about issues. It was found that marketing and operations managers believe in violating organisational rules and organisational hierarchy to accomplish the firm’s goals, and that finance managers were uncomfortable with ambiguity and expressed strong tendencies to follow rules.

People in the management function have been found to adopt creative behaviours because they had positions within the organisational hierarchy that allow them to reward innovators and punish protectors of the status quo. Technical people have been found to adopt creative roles because innovation was an important part of many technical jobs (non-alcoholic malt beverages; Fayrouz, Birell & Amstel Zero). Accountants were rarely portrayed as heroic innovators, as in most firms. This may, partly, be attributed to the presumption that the accounting profession is not regarded as a creative one (self-fulfilling prophecy).

The Privatisation of the firm has led to subsequently hiring younger managers who were likely to pursue creative strategies since older mangers coming from the former SOE culture were known to dislike change from the status quo and show greater adherence to the norms of the organisation. Younger managers reported more liberal attitudes towards organisational creativity and innovativeness than older managers.

With respect to providing an enabling environment, recognising the characteristics that are typically embedded in the Egyptian culture relating to power distance and hierarchy implied that the post-Privatisation senior managers were deeply committed to improving the environment for creativity. Thus, at ABC they recognised the true implications of consultation and implemented a more consultative style of management. The new management knew that if the risk-averse Egyptian employees are not provided active encouragement and do not see that their input is valued and acted upon; they will be reluctant to provide it.

The post-Privatisation strategy at ABC adhering to diversity management was established in 2002 under the new CEO (Marc Busain) – a young Belgian business savvy – to accommodate the fact that Egyptians are an extremely collectivistic people and there is ease in social interactions and formation of groups. This collectivism can result in strong group loyalty and cohesiveness and is a potential source of beneficial “social capital” – the resources derived from the network of relationship in a workgroup or organisation. Egyptians value the person and the relationship more than the task. The post-Privatisation challenge for an Egyptian work team, then, was maintaining a focus on powerful influence on group performance. While this was found to be positive, it could’ve simultaneously limited the group’s openness to alternative ways of doing things. The results of that strategy implied that employee teams should be allowed to decide how to achieve their goal; permitting such freedom and autonomy makes intrinsic motivations soar.

SHIFT IN LEADERSHIP STYLES – FROM ALPHA TO BETA

AHMED EL-ZAYAT (Charismatic leadership) – ALPHA TEAM

It was late in the afternoon on April 5, 1997 when Ahmed El Zayat, newly appointed CEO of the just-privatised Al Ahram Beverages Company (ABC), sat down in his office at the brewery and began to review ABC’s financial statements. Scrutinising the data, he saw potential as well as perils. ABC had no competitors, and had regularly yielded profits. But the company was also troubled with a public-sector mentality. Puffing on his cigar, Zayat knew that there was no going back. The deal was closed and he needed to figure out what to do next. His immediate concern was how to enable ABC to raise its performance and position itself locally and internationally for sustainable competitive advantage. With a capable board of directors and senior managers, Zayat was confident of his ability to help the company grow and develop.

Nonetheless, he would have to think long and hard about what strategies to adopt.

From the time the company was privatised in 1997, its ostentatious (and brilliant) management team headed by Chairman Ahmed El-Zayat took one bold step after another, insuring ABC a top spot in the business headlines. The media frenzy that surrounded ABC throughout its turnaround ended in a historic 2002 M&A deal when international brewing giant Heineken snapped up 98% percent of ABC for a whopping LE 1.33 billion.

After the acquisition, things have been ‘hush, hush’ at ABC, sparking speculation in the business community on where the company was going and who was taking it there. Rumours abounded that El-Zayat, who stayed on as chairman after the Heineken deal, was playing a diminished role.

Now, after all these years of autocratic leadership, finally El-Zayat was delegating day-to-day operations while he focused on strategy. To whom was he delegating after the acquisition took place? It was a new generation of junior ABC executives. El-Zayat has dubbed the “Alpha Team,” who have been instrumental in taking ABC in a new direction.

The Alpha Team

ABC’s marketing director, strategic planning manager and three technical experts in the beer-making operation hail from the Netherlands’ Heineken, but the core of the company remains 100% Egyptian.

 “The airplane is now my home, but ABC always has been and still is my baby. It’s getting the same focus, if not even more, than in the past. During my first three-four years at ABC, I was a very hands-on manager. I paid attention to every detail. I didn’t want to micromanage people, but at the time the company required a great deal of attention. Once all the basic elements were in place and we had consolidated our dominance, I began the second phase of my mission, which required that I turn my attention outside,” explains El-Zayat.

It was during that second phase that El-Zayat orchestrated the Heineken deal. He claims that he has just completed a third phase of his master plan for the company, one that again required him to spend a lot more time in Egypt and at the office.

“Being a much more mature and seasoned manager now than I used to be, I was able to mentor a lot of people. The new players are now much younger than their predecessors. I call them the hope of Egypt,” says El-Zayat of his Alpha Team.

The Alpha Team have played key roles in both post-acquisition corporate restructuring and launching ABC’s new product lines.

El-Zayat decided to launch the Alpha Team in September 2003. The idea was to establish a group of six ambitious young people, half of them from within the company and the others new hires, to monitor ABC’s entire operation with a birds-eye view. They report directly to El-Zayat and make sure his directions are being properly executed in keeping with the company’s general vision.

In the beginning, no one really understood what was going on. It just looked like young guys bossing around big directors and poking their nose into everything. But it was a great learning experience for the young team. They were in on all the meetings and brainstorming sessions. It really made them feel a part of the decision-making process. Before the Alpha Team, different departments were like separate islands. Part of their job is to elevate the level of communications. They created an unprecedented degree of transparency in the company.

Another new concept initiated was a break-up of the company into separate business units, one for non-alcoholic malt beverages [Fayrouz and Birelle], one for the beers [Stella, Heineken and Sakkara], one for the wines and the fourth for spirits. They needed to create ‘owners’ for the different segments of the business so that they could become responsible for everything within that segment, working closely with the functional departments: sales, marketing and production; something that would’ve never occurred before under the old style management.

ABC tends to undergo some degree of restructuring every year and remains unafraid of transferring personnel from one division to another.

In conjunction with the restructuring, the chairman distributed a 28-page report outlining the company’s new vision. Among its stated objectives are a thorough retraining of the entire staff, further automation of everything from production to warehousing and sales, and more focus on consumer research.

Then El-Zayat launched a second-generation Alpha Team to allow fresh eyes with a new outlook to scrutinise ABC’s operations. The first group more or less represented the much westernised Egyptian people with lots of foreign exposure while this new group draws from various elements in the society. They even have one veiled female member in the group.

The Organisational Structure under Ahmed El-Zayat Leadership

MARC BUSAIN (Visionary leadership) – BETA TEAM

Chairmen and CEOs come and go, but there are times when a company and its leader become so intrinsically linked that it’s difficult to imagine one without the other. Such as the case of ABC and its founder Ahmed El-Zayat.

Although El-Zayat’s physical pres